A body slam from The Rock pales in comparison to what is happening over at World Wrestling Entertainment (WWE) right now. The company's market value was cut in half on Friday upon news that WWE's new multiyear deal with Comcast's NBCUniversal shows just a 50% increase in rights fees, as opposed to estimates of two to three times the prior deal. Does the lackluster deal really mean that World Wrestling Entertainment is worth half of what it was earlier in the week, or is this an extreme example of marketmania?
Why it's happening
It's important to understand why the renegotiated deal is so important to WWE's business. As a recent Forbes piece pointed out, WWE programming draws more viewers than nearly all professional sports except the NFL. It is an extremely valuable and growing audience. In its existing deal, WWE had widely been considered underpaid for its programming, and investors and analysts waited eagerly for the new deal to yield a much better multiple and send WWE soaring.
Until recently a large shareholder, Intrepid Capital noted in its fourth-quarter investor letter that "we believe shares are pricing in an increase in domestic rights fees of around 70%, or an increase in global rights fees of 40%." Since then, the stock has appreciated an additional 25% (until Friday's clipping), implying a much higher multiple than was ultimately realized in the deal.
So, why did the deal come up so short of expectations? There's no definitive answer, but one thing to keep in mind is that, despite its incredible and stable viewership, WWE's programming appeals to a limited group of people. Sure, the company could have taken its offer elsewhere, and perhaps gotten a better deal than NBC offered, but it likely was not a heated and populated bid for the content. As is, NBC is broadcasting WWE on its USA and SyFy properties -- distant from the core network.
Worth the sell-off?
So let's get to it, then: Is the near-50% sell-off justified? It's not so much that WWE's business is declining -- it's still getting nearly $100 million more for its programming than it did in the previous deal. It's more a matter of valuation and expectations. WWE had a tremendous run-up in 2013 and sailed right into 2014 on the promise of higher rights fees and the launch of its streaming network.
The streaming network gained 670,000 subscribers -- a good showing for its first couple of months, but several hundreds of thousands short of where it needs to be in order to account for expectations and the cannibalized revenue from pay-per-view products. The company may get there yet, but the prospects are not looking crystal clear at this point.
What happened here was a rocket-ship stock getting brought back to Earth. The question is whether WWE is actually fairly, or even cheaply valued now given its growth prospects. Don't buy in just because of the massive sell-off. First, it's important to gauge the company's growth prospects and challenges. One thing is for sure, Vince McMahon and the WWE family are feeling the pain today.
